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Coal Coast Mag - Be Cash Smart... Your money questions answered

How much would you recommend putting away in a rainy day fund? Any tips for saving smarter and faster?

As much as we may try to predict the future, life always comes up with a way to throw us an unexpected curveball. Although you might not know what form your next unanticipated expense is going to take or how much it will cost, rest assured it's going to come at some point. With this in mind, a basis of a good financial plan is setting aside money for a rainy day fund. 

As to how much to set aside, this will vary depending on your lifestyle, monthly costs, income, and dependents. Our general rule of thumb is to have access to at least 3 months’ worth of living expense inclusive of mortgage repayments or rent, with 6 month’s being the ideal number. 

In regards to saving smarter and faster, the first port of call is having an intimate understanding of your living expense and how much you can realistically set aside. If you have a savings goal and timeframe in mind, its best to work backwards, and calculate what you will need to put aside to achieve it. Once you have set a realistic number, the easiest way to commit to a savings goal is to set up a regular direct debit shortly after your pay cycle into an account that is more difficult to access than an everyday bank account.

As to where to save, this is very much dependant on your savings objective. If it’s a short term saving goal, an interest bearing saving account is appropriate. However, if you have a longer term saving objective, consideration could be given to a low-cost diversified investment or even your superannuation fund. This will give your savings the best opportunity to compound and grow for your future benefit.

Should I be contributing to my own super account? How do I ensure my super account is best suited to me and what should I look for in a super fund?

Even with a lot of change in the superannuation space it remains the most effective place to build long term savings. No matter our clients ages and stages in life we recommend they pay particular attention to their superannuation fund, because at the end of the day almost 10% of your hard earned income is being contributed into it! We recommend consideration be given to making contributions to bolster the balance and to ensure that it is set up and structured appropriately.

The Superannuation System is very complex and navigating the endless number of super funds on offer is very difficult. Some key elements to look out for when reviewing your fund is the fees they charge – both administratively and for investment management; the investment options available and the amount of risk you are taking on; the performance of your investment over a 5 year plus timeframe; and the insurance you hold (if any) and the premium charged. Your employer will more likely than not, give you choice of fund, which means you can choose any super provider on offer in the marketplace. They may, however, also have a default fund they recommend. Best to compare apples with apples and understand the benefit of joining an employer default fund before you consider moving.

To ensure your superannuation balance is healthy when you are eligible to access, which can be as early as Age 60, we recommend making contributions ongoing over and above the statutory amount from your employer. These contributions are received into your superannuation fund pre-tax via either a salary sacrifice payment or deductible contribution (if you are self-employed), and are taxed at 15% on entry which for most is well below their marginal tax rate. If you are earlier in your working life, we would generally recommend committing to a more modest contribution amount, but leading to your retirement date, maximising your contributions into your superannuation fund can make a huge positive impact. 

In answering readers’ questions the advice is of a general nature and is not a substitute for personal financial advice from an independent adviser.